Foreign Resident Capital Gains Withholding Tax 2025

Significant changes are on the horizon for the Capital Gains Withholding tax regime in Australia, set to take effect from 1 January 2025. These modifications will have substantial implications for all property transactions within the country, regardless of the vendor's residency status. In this blog post, we'll explore these changes in detail, discussing their impact on both buyers and sellers in the Melbourne property market and beyond.

Understanding the Current Regime

The current system, introduced on 1 July 2016, requires purchasers to withhold a portion of the purchase price when buying certain types of property. While it's often referred to as the Foreign Resident Capital Gains Withholding (FRCGW) regime, it's important to note that it actually applies to all vendors, not just foreign residents. The withheld amount is remitted to the Australian Taxation Office (ATO) to ensure tax obligations on capital gains are met.Under the current rules:

• The withholding rate is 12.5% of the purchase price
• The regime applies to properties valued at $750,000 or more
• It covers taxable Australian real property and indirect Australian real property interests

Key Changes Coming in 2025

The Australian Government has announced several significant modifications to the withholding regime as part of its 2023-24 Mid-Year Economic and Fiscal Outlook. These changes aim to increase the integrity of the system and ensure a more comprehensive approach to taxing capital gains on Australian property investments.

1. Increased Withholding Rate

From 1 January 2025, the withholding rate will rise from 12.5% to 15% of the purchase price. This 2.5% increase can translate to substantial amounts, especially for high-value properties.

2. Removal of the Threshold

Perhaps the most significant change is the removal of the current $750,000 threshold. Under the new rules, the withholding will apply to all relevant property transactions, regardless of the property's value. This means that even lower-priced properties will now be subject to the withholding requirements, potentially affecting a much broader range of transactions.

3. Expanded Scope of Affected Assets

The changes will apply to acquisitions of relevant CGT assets, including:

• Taxable Australian real property
• Indirect Australian real property interests that provide company title interests

Impact on Property Transactions

These changes will have far-reaching effects on property transactions in Australia, particularly in property hotspots like Melbourne.

For Sellers:

All sellers, regardless of residency status, will see a larger portion of their sale proceeds withheld at settlement. For instance:

• On a $2 million property, the withholding amount will increase from $250,000 to $300,000
• For a $700,000 property that was previously exempt, sellers will now have $105,000 withheld

This increased withholding could impact cash flow and may require sellers to adjust their financial planning accordingly.

For Buyers:

Purchasers will need to be more vigilant about their withholding obligations. They'll be required to:

• Withhold 15% of the purchase price for all relevant transactions
• Remit the withheld amount to the ATO
• Ensure compliance even for lower-value property purchases

Compliance and Exemptions

Despite these changes, certain exemptions and compliance measures will remain in place:

Clearance Certificates:

Australian resident sellers can still avoid the withholding by obtaining a clearance certificate from the ATO before settlement. This certificate confirms that the vendor is not a foreign resident for tax purposes.

Vendor Declarations:

In some cases, vendors can provide a declaration stating that they are Australian residents or that the CGT assets are not indirect Australian real property interests.

Implications for the Melbourne Property Market

As a major Australian city with a thriving property market, Melbourne is likely to feel the effects of these changes significantly. These new rules may influence investment decisions and market dynamics for both local and foreign investors.Potential impacts on the Melbourne market could include:

• Increased due diligence and compliance costs for all property transactions
• Potential short-term market adjustments as stakeholders adapt to the new regime
• More complex cash flow considerations for sellers

Preparing for the Changes

With the implementation date set for 1 January 2025, all property market participants have time to prepare for these changes. Here are some steps to consider:

1. Stay informed: Keep up to date with any further announcements or refinements to the proposed changes.
2. Seek professional advice: Consult with tax professionals and legal experts to understand how these changes might affect your specific situation.
3. Review current and planned transactions: If you're involved in ongoing or planned property deals, consider how the new rules might impact them.
4. Update processes: For those regularly involved in property transactions, update your internal processes to reflect the new withholding requirements.

Conclusion

The changes to the Capital Gains Withholding tax regime represent a significant shift in Australia's approach to property transactions. While these modifications aim to enhance the integrity of the tax system, they will undoubtedly have substantial implications for both buyers and sellers in the property market, particularly in bustling cities like Melbourne.As we move closer to the implementation date of 1 January 2025, it's crucial for all stakeholders in the property market to stay informed and prepare accordingly.

Whether you're a foreign investor, a local buyer, or a property professional, understanding these changes will be key to navigating the evolving landscape of Australian property transactions.For more detailed information about how these changes might affect your property transactions or to receive a free Section 32 contract review, don't hesitate to contact the experts at Pearson Chambers Conveyancing. Our team is ready to assist you in understanding and adapting to these new regulations.Contact Pearson Chambers Conveyancing:

• Phone: 03 9969 2405
• Email: contact@pearsonchambers.com.au

Stay ahead of the curve and ensure your property dealings are compliant and optimised in light of these upcoming changes.